Money Rehab with Nicole Lapin - What to Do with Your Tax Refund

Episode Date: April 25, 2022

If you’re getting a tax refund: good news! But, don’t let this golden opportunity pass you by. Nicole explains three stellar options for your tax refund.  See omnystudio.com/listener for privacy information.

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are you ready for some money rehab? And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money. Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand.

Nicole Lappin. Unless you filed an extension, you should have submitted your tax return last Monday. And if you haven't, well, you better catch a tax return in ASAP, Rocky, or you'll keep raking up the late fees. When you filed, you should have figured out whether you owe some money to the IRS, boo, or maybe you're getting a refund back. Yay. If you are getting a refund, remember, this is not free money. Like I mentioned back in episode 265, The Truth About Tax Refunds, the cashola you get back from your tax return has always been your money. Uncle Sam has just borrowed a little more money than he should have, and now he's paying you back. Regardless, it is an exciting day.

I get it when you get some cash that you weren't expecting back. And I know the temptation might be to go out and buy yourself something purdy. And sure, go ahead. Use a little bit of your refund for a small financial indulgence. I do think small financial indulgences do keep you from overspending later on, but a tax refund is such a fantastic opportunity to take a leap forward in your financial goals. You shouldn't miss this opportunity by spending your entire tax refund on said financial indulgence. Instead, there are three things that you should consider doing with your refund. Number one, pad your emergency fund. If you don't have a chunk of money saved that would cover six months of your bare bone expenses,

you need to before making any other money move. In the last few years, we've definitely seen shit hit the fan, war, a pandemic, rising inflation, supply chain shortages, widespread layoffs. So I don't need to tell you that life is capable of throwing some major curveballs. An emergency fund is what keeps you from completely striking out. fund is what keeps you from completely striking out. Number two, open a Roth IRA. If you haven't set up a Roth IRA yet, now might be the perfect time. As you remember, a Roth IRA is a type of retirement account that you fund with post-tax money, or in other words, money that you've already paid tax on. So unlike a 401k or a traditional IRA, when it comes time to take money out of a Roth IRA, you don't have to pay tax on that money that you take out because you already paid it.

This makes your nest egg easier to account for over time. We can't see into the future and predict what tax rates are going to be the year you retire, but tax rates will likely increase. So those investing in a 401k or traditional IRA have an unknown tax bill looming, while those with a Roth IRA are going to have no surprises. In 2022, you can contribute a maximum of $6,000 to a Roth IRA if you're under 50. I recommend folks try and max out their Roth IRA contributions every single year. So if you get more than six grand back from Uncle Sam, take your Roth to the max. Number three, index funds and chill. Another savvy money move when you have a little unexpected extra money is to invest it. And as you probably know by now, my favorite investment option for

newbie investors is in index funds. As a reminder, when you buy an index fund, you're basically buying a little bit of several companies instead of putting all of your tax refund eggs in one proverbial investment basket. If this would be your very first venture into the investing world, don't stress. Index funds are a perfect way to get your feet wet in the investing pool because by the nature of the way they're set up, it's much less risky than investing in one single company. For today's tip, you can take straight to the bank. If you're having a difficult time choosing which of these three marvelous, marvelous, if I don't say so myself, options to choose, start with an emergency fund. Yes, Roth IRAs are awesome, but you can't use them to make rent if you're short on cash or at least not without a big penalty.

So if you don't have six months of your bare bone expenses saved, protect your future self and lock down that doomsday fund. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.